Do Actions Match Words? Reassessing the Taylor Rule in an Emerging-market Context

Abstract

We examine whether India's adoption of inflation targeting in 2015 aligned central bank communication with policy actions---a key determinant of credibility in emerging markets. Text analysis reveals the Reserve Bank of India's (RBI) communication shifted toward emphasizing inflation stabilization. Yet standard Taylor rules show no increase in responsiveness to realized inflation. This misalignment disappears when we estimate forward-looking reaction functions using the RBI's internal forecasts. The post-2015 response to expected inflation is strong and significant. Our findings show that conventional backward-looking rules can mischaracterize monetary policy conduct in emerging markets where policy responds to forecasts rather than realized outcomes.